BIAS REPORT
Confidence Biases
Overconfidence : Below Average
Over-Optimism : Below Average
~ Whitney Tilson (Fool.com)
Overconfidence refers to the tendency to see oneself and one's abilities as better than they actually are. Specifically, overconfident investors misinterpret the accuracy and importance of their information (what they know) and overestimate their skill in analyzing it. Additionally, overconfidence results in a tendency to underestimate investment risk and to have higher turnover.
Men are more likely to be overconfident than women, and young adults are more likely to be overconfident than older adults. Ironically, "experts" are more overconfident than lay-people, as they often overweigh the predictive power of their own models. Additionally, more difficult decisions (e.g. forecasting the market) inspire more overconfidence in forecasters.
"Who has confidence in himself will gain the confidence of others."
~ Leib Lazarow
Overconfidence can be destructive in investing, where a belief in one's superiority does not translate into bigger profits. However, overconfident financial planners have been found to attract more business than less-confident rivals, even while having lower overall performance than their colleagues. In many business endeavours, overconfidence both attracts more clients and leads to greater overall risk-taking. However, in investing, overconfidence can lead to long-term underperformance if it is not balanced by experience.
HIGH SCORERS:
"Before you attempt to beat the odds, be sure you could survive the odds beating you."
~ Larry Kersten (author and sociologist)
If you are a high scorer, to balance your potential for overconfidence in investing, you should:
1. Practice humility. No matter how well you have been investing, you can suffer losses if you approach the markets with arrogance about past profits or entitlement to new ones. Every day consider the possible market risks, and actively seek out new ones.
2. Think before you leap. If you have a problem acting too quickly on your private information, then deliberately pause for a brief cooling-off period between having a strong opinion about the market and executing it. Remember, there will always be more opportunities.
3. After a string of wins, be careful of feeling that you're invincible. It's usual, after a series of wins, to feel "on top of the world." However, beware of taking on excessive risk or leverage at these times. Overconfident hubris is the result of a string of wins, and it nearly always leads to big losses.
4. Engage in a more thorough evaluation of your investment plans. In particular, remember to look at historical parallels and to perform adequate historical analysis of your investment ideas.
LOW SCORERS:
If you are a low scorer, you are more likely to be realistic about your investment knowledge and expected returns. However, you may be susceptible to the following if you are “under confident” (In the very low range):
1. Under confident investors may be too afraid of potential losses to pursue opportunities. To combat under confidence, list and be grateful for your accomplishments. Remind yourself, with evidence, that you are capable and competent. Sometimes under confidence is a real result of knowing less than others about investing. In that case, be sure to gain the appropriate education and experience before taking risk.
2. Some under confident investors are hyperaware of risks. In this case, you should review historical investment information and notice if you are overweighting negatives and overlooking positives. Your challenge is to develop a realistic appraisal of risks and your ability to handle them. It is possible that you have a greater ability to manage risk than you believe.
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